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With the current uncertainty and volatility in the stock market, buyers are trying to identify investment opportunities that will provide strong growth prospects. One of the market sectors that has had increasing interest from buyers is small cap stocks. This article will review five small cap stocks that have recently been surging in value, and specifically yielded returns over the last two months of greater than 20%. Prior to investing in any hot stock it is important to determine what is driving the stock price higher. Is it triggered by strong company fundamentals and solid earnings growth or market rumor.

Jazz Pharmaceuticals (NASDAQ:JAZZ)

Jazz Pharmaceuticals has a market cap of $1.58 billion with a price to earnings ratio of 18.66. For a 52 week period its trading range has been $10.51 to $47.88. It is currently trading at around $40 per share. It reported second quarter earnings 2011 of $64.57 million, an increase from first quarter earnings of $50.88 million. Second quarter net income was $33.20 million, an increase from first quarter net income of $21.83 million. The company has quarterly revenue growth of 59.50%, a return on equity of 217.44%, and doesn’t pay a dividend.

One of Jazz Pharmaceuticals’ closest competitors is Pfizer Inc (NYSE:PFE). Pfizer is trading at around $20 per share and has a market cap of $148.47 billion. It has a price to earnings ratio of 17.78, quarterly revenue growth of 8.70% and a return on equity of 9.83%. Pfizer pays a dividend with a yield of 4.20%. Based on these performance indicators, Jazz in substantially outperforming Pfizer, although Pfizer pays an attractive dividend.

Jazz Pharmaceuticals cash position has improved, its second quarter 2011 balance sheet showed $102.40 million in cash, an increase from $65.46 million in the first quarter. It has quarterly revenue growth of 59.50%, versus an industry average of 19.80%, and a return on equity of 217.44%, versus an industry average of 8.70%, indicating that it is outperforming many of its industry peers.

The current outlook for the biotechnology industry is difficult to predict, while the overall outlook for the drug manufacturing and biotechnology industry is gloomy, it is far more upbeat for small to medium cap biotech companies despite tight credit markets and the poor economic outlook. In addition, a devalued US dollar makes US exports more competitive in global markets.

Even though the economic outlook is subdued, when Jazz’s strong net income growth combined with solid performance indicators is considered, the buying interest in the company is justified. Accordingly I rate Jazz Pharmaceuticals as a buy.

Hansen Natural Corporation (HANS)

Hansen Natural Corporation has a market cap of $7.82 billion and a price to earnings ratio of 32.33. For a 52 week period its trading range has been $48.28 to $96.94. It is currently trading at around $89.00. The company reported second quarter earnings for 2011 as $462.15 million, an increase from first quarter earnings of $356.42 million. Second quarter net income was $84.25 million, an increase from first quarter net income of $55.04 million. It has quarterly revenue growth of 26.40%, a return on equity of 31.30%, and currently doesn’t pay a dividend.

One of Hansen’s closest competitors is Pepsico Inc (NYSE:PEP). Pepsico is trading at around $62.00 and has a market cap of $97.10 billion. It has quarterly revenue growth of 13.30%, a return on equity of 29.03% and pays a dividend with yield of 3.30%. Both companies are performing strongly, but Hansen is outperforming Pepsico, although Pepsico pays a dividend with an attractive yield.

Hansen’s cash position has improved, its second quarter 2011 balance sheet showed $418.20 million in cash, an increase from $295.51 million in the first quarter. Its quarterly earnings growth of 26.40% is greater than the industry average of 14.30%, while its return on equity of 31.30% is greater than an industry average of 27.00%. Based on these performance indicators, Hansen is outperforming many of its industry peers.

The earnings outlook for the beverages and soft drinks industry is downbeat due to the difficult market conditions caused by the poor economic climate, continuing high unemployment and negative consumer sentiment.

Despite the depressed earnings outlook Hansen’s substantial increase in net income combined with a substantially stronger cash position and solid performance indicators shows the company is well positioned to capitalize on any future growth opportunities. Accordingly I rate Hansen as a buy.

ZAGG Inc (NASDAQ:ZAGG)

ZAGG Inc has a market cap of $386.91 million, with a price to earnings ratio of 25.12. For a 52 week period its trading range has been $6.23 to $17.10. It is currently trading at around $13.00. The company reported second quarter 2011 earnings of $38.79 million, an increase from first quarter earnings of $26.98 million. Second quarter net income was $2.74 million, a decrease from first quarter net income of $3.31 million. It is achieving quarterly revenue growth of 157.60%, a return on equity of 24.09%, and currently doesn’t pay a dividend.

One of ZAGG’s closest competitors is Motorola Mobility Holdings Inc (NYSE:MMI). Motorola Mobility trades at around $40.00, has a market cap of $11.55 billion and doesn’t have a price to earnings ratio. It has quarterly revenue growth of 27.90%, a return on equity of -2.38% and doesn’t currently pay a dividend. Based on these performance indicators, it is underperforming ZAGG.

ZAGG’s cash position has improved, its second quarter 2011 balance sheet showed $13.45 million in cash, an increase from $1.77 million in the first quarter. It has quarterly earnings growth of 157.60% versus an industry average of 5.90%, and a return on equity of 24.09%, versus an industry average of 12.70%. Based on these performance indicators ZAGG is outperforming many of its industry peers.

The earnings outlook for the specialty retailing industry is subdued due to the current economic uncertainty, high unemployment and poor consumer sentiment. In addition, the devalued US dollar has made imported products more expensive.

On the basis of the industry’s poor earnings outlook combined with ZAGG’s decrease in net income I believe there are better investment opportunities in the market and rate ZAGG as a hold.

Twin Disc Incorporated (NASDAQ:TWIN)

Twin Disc Incorporated has a market cap of $398.98 million. For a 52 week period its trading range has been $18.93 to $42.82. It is currently trading at around $35.00. The company reported second quarter earnings 2011 as $97.37 million, an increase from first quarter earnings of $76.47 million. Second quarter net income was $7.60 million, an increase from first quarter net income of $4.54 million. Twin Disc has quarterly revenue growth of 51.40%, a return on equity of 16.68%, and pays a dividend with a yield of 1.20%.

One of Twin Disc’s closest competitors is Federal-Mogul Corp (NASDAQ:FDML). Federal-Mogul is trading at around $18.00. It has a market cap of $1.75 billion with a price to earnings ratio of 8.26. It has quarterly revenue growth of 12.60% and a return on equity of 15.61%. Federal-Mogul currently doesn’t pay a dividend. Based on these performance indicators Twin Disc is outperforming Federal-Mogul.

Twin Disc’s cash position has improved, its second quarter 2011 balance sheet showed $20.17 million in cash, an increase from $18.50 million in the first quarter. Twin Disc has quarterly revenue growth of 51.40%, well above the industry average of 11.80%, and a return on equity of 16.68%, versus an industry average of 11.90%. This indicates that the company is outperforming many of its industry peers.

Although the overall economic outlook is subdued, the low US dollar should make US manufactured goods more attractive to overseas buyers and this bodes well for US based manufacturers such as Twin Disc.

When this is considered in conjunction with Twin Disc’s increased net profit and cash holdings as well its strong performance indicators, I rate the company as a buy.

Diamond Foods Inc (NASDAQ:DMND)

Diamond Foods Inc has a market cap of $1.41 billion with a price to earnings ratio of 28.74. For a 52 week period its trading range has been $42.96 to $96.13. It is currently trading at around $64.00. The company reported second quarter earnings 2011 as $232.78 million, an increase from first quarter earnings of $222.99 billion. Second quarter net income was $8.54 million, an increase from first quarter net income of $7.73 million. The company is achieving quarterly revenue growth of 31.70%, a return on equity of 12.03%, and pays a dividend with a yield of 0.30%.

One of Diamond Foods’ closest competitors is ConAgra Foods Inc (NYSE:CAG). ConAgra Foods currently trades at around $25.00, has a market cap of $10.42 billion and a price to earnings ratio of 14.29. It has quarterly revenue growth of 9.50%, a return on equity of 15.94%, and pays a dividend with a yield of 3.80%. Based on these performance indicators ConAgra Foods is underperforming Diamond Foods.

Diamond Foods’ cash position has improved, its second quarter 2011 balance sheet showed $3.11 million in cash, an increase from $1.54 million in the first quarter. Diamond Foods’ quarterly earnings growth of 31.70%, versus the industry average of 10.50%, and a return on equity of 12.03%, versus an industry average of 30.00% indicates that the company is performing on par with many of its peers, although it is lagging in its return on equity.

The earnings outlook for the processed and packages goods industry is expected to remain stable. Although, as Fitch Ratings have highlighted, it is expected that consumers will remain value conscious when making food purchase decisions primarily due to the uncertain economic outlook and high unemployment.

Based on industry outlook combined with Diamond Foods’ increased net income, improved cash position and solid performance indicators I rate the company as a buy.

Source: 5 Small Caps That Could Surge Higher